Nthn.elec.prf Regulatory News (NTEA)

28 Oct 2005 13:25

Northern Electric PLC28 October 2005 NORTHERN ELECTRIC plc INTERIM REPORT SIX MONTHS ENDED 30 JUNE 2005 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 COMMENTARY Adoption of International Financial Reporting Standards ("IFRS") From 1 January 2005, Northern Electric plc is required to prepare consolidatedfinancial statements in accordance with IFRS, which is the required reportingbasis for all European Union listed companies from 2005. The Company previously prepared consolidated financial statements in accordancewith UK GAAP until 31 December 2004. The interim accounts for the six months ended 30 June 2005 are the Company'sinitial financial statements prepared under IFRS and do not comprise statutoryaccounts within the meaning of Section 240 of the Companies Act 1985. The date of transition to IFRS is 1 January 2004. As part of the IFRS transition the Company is publishing restated condensedfinancial information in relation to the year ended 31 December 2004 and the sixmonths ended 30 June 2004 together with statements showing the adjustments madeto these previously reported UK GAAP results under IFRS. In addition, a summaryreconciliation of equity is also provided. The interim accounts for the six months ended 30 June 2005 and related noteshave been reviewed by Deloitte & Touche LLP. Their review report to the Companyis published on pages 3 and 4. Financial Overview During the six months ended 30 June 2005 the consolidated profit from ordinaryactivities after tax was £39.1m which represented an increase of £3.2m whencompared with the same period in the prior year primarily reflecting higherincome received from its interests in associated companies. No ordinary dividends were paid in the period resulting in £39.1m beingtransferred to reserves. An interim dividend of £50.0m was declared and paid on26 July 2005. The results of Northern Electric Distribution Limited ("NEDL"), a wholly ownedsubsidiary, reflect the impact of the revised distribution price control, whichis effective for the period 1 April 2005 to 31 March 2010 as agreed with theregulator, The Office of Gas and Electricity Markets ("Ofgem"). Tariffs for theuse of NEDL's electricity distribution network were increased by approximately5% with effect from 1 April 2005 in order to reduce the shortfall of revenuesallowed under the regulatory price control formula prior to this date. The Group has reached agreement with the Independent Trustee and Group Trusteesto repair the defined benefit pension scheme deficit. In financial terms theagreement comprises monthly cash payments of £1.9m (£23.1m per annum) startingin April 2005.Of these payments £0.3m (£3.8m per annum) are recovered by theGroup from other companies within the CE Electric UK Funding Company Group, theultimate UK parent company. These payments address the funding deficiency of£116.6m over six years and the deficit of £190.3m over 12 years subject tomovements in actuarial assumptions. On 5 May 2005 the Company's wholly owned subsidiary, Northern Electric Financeplc issued £150.0m of 5.125% bonds due 2035, guaranteed as to principal andinterest by NEDL and Ambac Assurance UK Limited. £100.0m of the proceeds wasinvested in a guaranteed investment contract at a rate of 4.75%, which matureson 27 December 2007. Capital expenditure during the period was £41.8m primarily in relation to theelectricity distribution network. Net debt at 30 June 2005 was £57.3m which represented a reduction of £6.7m since31 December 2004. Cash and cash equivalents were £203.8m as at 30 June 2005. Outlook The Company will continue to invest in its electricity distribution network andfocus on exceeding Ofgem's targets for customer service whilst endeavoring tominimise the level of operating costs. NEDL's revenues for the period to 31 March 2010 have been set by Ofgem. Enquiries John Elliott Company Secretary 0191 2235103 INDEPENDENT REVIEW REPORT TO THE MEMBERS OF NORTHERN ELECTRIC plc Introduction We have been instructed by the Company to review the financial information forthe six months ended 30 June 2005 which comprises the consolidated incomestatement, the consolidated statement of recognised income and expense, theconsolidated balance sheet, the consolidated cash flow statement and relatednotes 1 to 12. We have read the other information contained in the interimreport and considered whether it contains any apparent misstatements or materialinconsistencies with the financial information. This report is made solely to the Company in accordance with Bulletin 1999/4issued by the Auditing Practices Board. Our work has been undertaken so that wemight state to the members of the Company those matters we are required to stateto them in an independent review report and for no other purpose. To the fullestextent permitted by law, we do not accept or assume responsibility to anyoneother than the Company, for our review work, for this report, or for theconclusions we have formed. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority and the requirements of InternationalAccounting Standard 34, "Interim Financial Reporting" ("IAS 34"), which requirethat the accounting policies and presentation applied to the interim figures areconsistent with those applied in preparing the preceding annual accounts exceptwhere any changes, and the reasons for them, are disclosed. International Financial Reporting Standards ("IFRSs") As disclosed in note 12, the next annual financial statements of the group willbe prepared in accordance with IFRSs as adopted for use in the EU. Accordingly,the interim report has been prepared in accordance with IAS 34 and therequirements of IFRS 1, "First Time Adoption of International FinancialReporting Standards" relevant to interim reports. Review work performed We conducted our review in accordance with the guidance contained in Bulletin1999/4 issued by the Auditing Practices Board for use in the United Kingdom. Areview consists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the accounting policies and presentationhave been consistently applied unless otherwise disclosed. A review excludesaudit procedures such as tests of controls and verification of assets,liabilities and transactions. It is substantially less in scope than an auditperformed in accordance with International Standards on Auditing (UK andIreland) and therefore provides a lower level of assurance than an audit.Accordingly, we do not express an audit opinion on the financial information. Limitation of scope The evidence available in respect of Teesside Power Limited, an associatedcompany, was limited because financial information in respect of that associate,prepared in accordance with IFRSs was not available to either the directors orourselves. The carrying value of the investment in this associate is includedat nil within the accompanying financial information at 1 January 2004, 30 June2004 and 31 December 2004 under IFRSs, based on the associate's net liabilitiescalculated in accordance with applicable United Kingdom law and accountingstandards. There were no other satisfactory procedures that we could adopt todetermine the effect of any restatement necessary under IFRSs. Qualified review conclusion arising from limitation of scope Except for any adjustments to the financial information that might have beenfound to be necessary had we been able to obtain sufficient evidence concerningthe financial information in respect of Teesside Power Limited, on the basis ofour review we are not aware of any material modifications that should be made tothe financial information as presented for the six months ended 30 June 2005. Deloitte & Touche LLP Chartered Accountants and Registered Auditors Newcastle upon Tyne 28 October 2005 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 CONSOLIDATED INCOME STATEMENT 6 Months ended 6 Months Year ended 30 June 2005 ended 30 June 2004 31 December 2004 Note Unaudited Unaudited Audited £m £m £m Revenue 3 135.8 142.8 287.8 Cost of sales (41.2) (45.2) (94.1) Gross profit 94.6 97.6 193.7 Distribution costs (27.5) (25.3) (49.2) Administrative expenses (4.7) (8.5) (20.6) Operating profit 3 62.4 63.8 123.9 Share of profits of associates and joint 0.3 0.3 0.5ventures Other income 4.7 - 0.1 Finance costs - net (9.6) (10.9) (20.8) Profit before tax 3 57.8 53.2 103.7 Income tax expense 4 (18.7) (17.3) (42.4) Profit from ordinary activities after tax 39.1 35.9 61.3 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE There is no other income or expense other than the profits reported above. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 CONSOLIDATED BALANCE SHEET AT 30 JUNE 2005 30 June 30 June 31 December 2004 Note 2005 2004 Unaudited Unaudited Audited £m £m £m Non-current assetsProperty, plant and equipment 964.2 896.2 937.2Intangibles 6.1 7.2 6.9Investments in associates 3.2 2.9 3.1Investments in other companies 13.6 0.1 0.1Long-term securities 100.0 - -Trade receivables 4.1 4.7 4.8 1,091.2 911.1 952.1 Current assetsInventories 21.3 14.5 13.1Trade and other receivables 42.5 38.5 46.2Cash and cash equivalents 203.8 145.7 152.9 267.6 198.7 212.2 Total assets 1,358.8 1,109.8 1,164.3 Current liabilitiesTrade and other payables (90.8) (72.7) (76.2)Current income tax liabilities (19.0) (27.5) (30.7)Borrowings (100.0) - (99.9)Provisions (6.4) (8.7) (8.0) (216.2) (108.9) (214.8) Net current assets/(liabilities) 51.4 89.8 (2.6) Non-current liabilitiesBorrowings (246.7) (199.2) (99.4)Deferred income tax liabilities 7 (148.3) (127.8) (142.0)Retirement benefit obligations (55.1) (72.2) (66.8)Deferred revenue (291.0) (264.6) (278.8)Provisions (0.3) (0.4) (0.4) (741.4) (664.2) (587.4) Total liabilities (957.6) (802.2) (773.1) Net assets 401.2 336.7 362.1 EQUITYShare capital 72.2 72.2 72.2Share premium 158.8 158.8 158.8Retained earnings 164.0 99.5 124.9Other reserves 6.2 6.2 6.2 Equity attributable to equity holders of the parent 401.2 336.7 362.1 The interim accounts were approved by the board of directors on 28 October 2005and signed on its behalf by J M France, Director NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 CONSOLIDATED CASH FLOW STATEMENT 6 Months 6 Months Year ended ended ended 30 31 December 30 June June 2005 2004 2004 Note Unaudited Unaudited Audited £m £m £m Net cash from operating activities 9 25.7 70.6 114.3 Investing activitiesDividends received from joint ventures 0.2 0.2 0.2Proceeds from disposal of business unit/associate 3.5 - (1.1)Purchase of long term securities (100.0) - -Proceeds from disposal of property, plant and equipment - - 0.1Purchases of property, plant and equipment (42.0) (45.0) (95.0)Purchases of intangible assets (0.4) (1.2) (1.8)Receipt of customer contributions 17.8 10.2 27.6 Net cash used in investing activities (120.9) (35.8) (70.0) Financing activitiesMovement in loan from parent undertaking (3.2) 0.6 (1.7)New loans raised 149.3 - - Net cash from/(used in) financing activities 146.1 0.6 (1.7) Net increase in cash and cash equivalents 50.9 35.4 42.6 Cash and cash equivalents at beginning of period 152.9 110.3 110.3 Cash and cash equivalents at end of period 203.8 145.7 152.9 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS 1. GENERAL INFORMATION The information for the year ended 31 December 2004 does not constitutestatutory accounts as defined in section 240 of the Companies Act 1985. A copyof the statutory accounts for that year has been delivered to the Register ofCompanies. The auditors' report on those accounts was unqualified. 2. ACCOUNTING POLICIES Basis of preparation The interim financial statements have been prepared in accordance with IFRS thatthe directors expect to be applicable as at 31 December 2005. IFRS are subjectto amendment or interpretation by the International Accounting Standards Boardand there is an ongoing process of review and endorsement by the EuropeanCommission. For these reasons, it is possible that the information for the sixmonths ended 30 June 2005 and the restated information for the six months ended30 June 2004 and year ended 31 December 2004 may be subject to change beforetheir inclusion in the Group's 2005 Annual Report and Accounts, which willcontain the Group's first complete financial statements prepared in accordancewith IFRS. In preparing these interim consolidated financial statements in accordance withIFRS 1, the Group has applied the mandatory exceptions from full retrospectiveapplication of IFRS. In addition it has elected to recognise all cumulativepension scheme actuarial gains and losses as at 1 January 2004. The particular accounting policies adopted by the directors are described below. Basis of consolidation The interim accounts consolidate the accounts of Northern Electric plc and itssubsidiary undertakings. Undertakings, other than subsidiary undertakings, whichthe Group jointly controls are treated as joint ventures. Where material theGroup accounts include the appropriate share of these undertakings' results andreserves based on accounts prepared to the balance sheet date. Revenue Revenue represents charges for the use of the Group's distribution network,amortisation of customer contributions and the invoiced value of other goodssold and services provided, exclusive of value added tax. Income from creditsales charges is apportioned in the trading accounts over the period of thesales agreements. Profit is recognised on long-term contracts, if the final outcome can beassessed with reasonable certainty, by including in the profit and loss accountturnover and related costs as contract activity progresses. Revenue iscalculated as that proportion of the total contract value which costs incurredto date bear to total expected costs for that contract. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 2. ACCOUNTING POLICIES (continued) Property, plant and equipment and depreciation Property, plant and equipment is stated at cost. The charge for depreciation iscalculated to write off assets to their residual values over their estimateduseful lives on a straight-line basis: Distribution system assets 50 years Metering equipment included in distribution system assets up to 15 years Non-operational assets: Buildings - freehold up to 60 years - leasehold lower of lease period or 60 years Fixtures and equipment up to 10 years Software development costs up to 10 years Freehold land is not depreciated. Customer contributions Customer contributions towards distribution system assets are included indeferred revenue. The Group's policy is to credit the customer contribution torevenue over 50 years on a straight-line basis, in line with the useful life ofthe distribution system assets. Software development costs Costs in respect of major developments are capitalised and amortised over theexpected life of the software. Capitalised software costs that are not an integral part of the related hardwareare included in intangible assets on the balance sheet and amortised over theexpected life of the software of up to 10 years. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 2. ACCOUNTING POLICIES (continued) Investments Investments in associates and joint ventures are shown using the equity method.The Group's share of the results of associates and joint ventures is included inthe income statement. Fixed asset investments are stated at cost less provision or amounts written offfor impairment in value. Inventories Inventories are stated at the lower of cost and net realisable value as follows: Raw materials and goods for resale - purchase cost on an average pricebasis. Work in progress - cost of direct materials and labour plus attributableoverheads based on the normal level of activity less progress payments onshort-term contracts. Net realisable value is based on estimated selling price less further costsexpected to be incurred to completion and disposal. Long-term contracts Amounts recoverable on long-term contracts, which are included in tradereceivables, are stated at the net sales value of the work done less payments onaccount. Cumulative costs incurred net of amounts transferred to cost of sales,less provision for anticipated future losses on contracts, are included as workin progress in inventories. Leases Rental costs under operating leases are charged to the income statement in equalamounts over the periods of the leases. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 2. accounting policies (continued) Taxation Income tax expense represents the sum of the tax currently payable and deferredtax. The tax currently payable is based on taxable profit for the year. Taxableprofit differs from profit as reported in the income statement because itexcludes items of income or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. TheGroup's liability for current tax is calculated using tax rates that have beenenacted or substantially enacted at the balance sheet date. Deferred tax is recognised on differences between the carrying amounts of assetsand liabilities in the financial statements and the corresponding tax bases usedin computation of taxable profit, and is accounted for using the balance sheetliability method. Deferred tax liabilities are generally recognised for alltaxable temporary differences and deferred tax assets are recognised to theextent that it is probable that taxable profits will be available against whichdeductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to berecovered. Deferred tax is calculated at the tax rates that are expected to apply in theyear when the liability is settled or asset realised. The interim tax charge is arrived at by applying the estimated tax rate for theyear. Research costs Expenditure on research activities is written off to the income statement in theyear in which it is incurred. Debt Debt is initially stated at the amount of the net proceeds after deduction ofissue costs. Issue costs are amortised over the period of the related loan. Borrowing costs are allocated to the income statement as incurred. Derivatives The Group may use derivative financial instruments to reduce exposure to foreignexchange risk and interest rate movements. As at 30 June 2005 the Group did nothold any derivative financial instruments. Cash and cash equivalents Loans advanced to the parent company are included within cash and cashequivalents, having a maturity of less than three months. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 2. accounting policies (continued) Pensions The Group contributes to the Electricity Supply Pension Scheme, a definedbenefit scheme. The cost of providing benefits is determined using the projected unit creditmethod, with actuarial valuations being carried out at each December balancesheet date. Actuarial gains and losses arising from experience adjustments andchanges in actuarial assumptions in excess of the greater of 10% of the value ofthe plan assets or 10% of the defined benefit obligation are spread to incomeover the employees' expected average remaining working lives. Past service cost is recognised immediately to the extent that the benefits arealready vested, and otherwise is amortised on a straight-line basis over theaverage period until the benefits become vested. The cost for the interim period represents 50% of the annual charge ascalculated above. The liability recognised in the balance sheet represents the present value ofthe defined benefit obligation less the fair value of the scheme assets on a bidvalue basis, together with adjustments for unrecognised actuarial gains andlosses and past service costs. The defined benefit obligation is calculated annually by independent actuariesusing the projected unit credit method. The present value of the defined benefitobligation is determined by discounting the future cash outflows using interestrates of high quality sterling corporate bonds that have terms to maturityapproximating to the terms of the related pension liability. The liability at the interim period represents the liability at the beginning ofthe year as adjusted by the difference between the pension cost calculated aboveand the contributions paid for the interim period. The Group participates in a defined contribution scheme. Contributions payableto the scheme are charged to the income statement in the period. Differencesbetween contributions payable in the period and contributions actually paid areshown as either accruals or prepayments in the balance sheet. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 3. REVENUE AND SEGMENTAL ANALYSIS The Group operates in two principal areas of activity, that of the distributionof electricity and electrical contracting, predominantly in the United Kingdom. Six months ended 30 June 2005 (Unaudited) Electrical Distribution Contracting Other Total £m £m £m £m REVENUEExternal 92.8 42.4 0.6 135.8Inter-segment sales - 14.1 (14.1) - Total Revenue 92.8 56.5 (13.5) 135.8 SEGMENT RESULTSOperating profit 46.5 5.8 10.1 62.4Share of profits of associates andjoint ventures - - 0.3 0.3Other income - - 4.7 4.7Finance costs - net (11.1) - 1.5 (9.6) Profit before tax 35.4 5.8 16.6 57.8 OTHER INFORMATIONCapital additions 44.8 0.1 (3.1) 41.8Depreciation and amortisation 15.6 0.2 (0.2) 15.6Amortisation of deferred revenue (3.2) - - (3.2) "Other" comprises generation, business support units and consolidationadjustments. Interest on loans to and from the different activities is charged at acommercial rate of interest. Sales and purchases between the different activities are made at market prices. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 3. TURNOVER AND SEGMENTAL ANALYSIS (continued) 6 months ended 30 June 2004 (Unaudited) Electrical Distribution Contracting Other Total £m £m £m £m REVENUEExternal 98.8 43.4 0.6 142.8Inter-segment sales - 13.6 (13.6) - Total Revenue 98.8 57.0 (13.0) 142.8 SEGMENT RESULTSOperating profit 56.9 5.2 1.7 63.8Share of profits of associates andjoint ventures - - 0.3 0.3Finance costs - net (10.8) - (0.1) (10.9) Profit before tax 46.1 5.2 1.9 53.2 OTHER INFORMATIONCapital additions 44.0 0.1 (2.5) 41.6Depreciation and amortisation 12.8 0.2 (0.2) 12.8Amortisation of deferred revenue (2.7) - - (2.7) "Other" comprises generation, business support units and consolidationadjustments. Interest on loans to and from the different activities is charged at acommercial rate of interest. Sales and purchases between the different activities are made at market prices. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 3. TURNOVER AND SEGMENTAL ANALYSIS (continued) Year ended 31 December 2004 (Audited) Electrical Distribution Contracting Other Total £m £m £m £m REVENUEExternal 193.0 93.5 1.3 287.8Inter-segment sales - 27.8 (27.8) - Total Revenue 193.0 121.3 (26.5) 287.8 SEGMENT RESULTSOperating profit 106.0 9.9 8.0 123.9Share of profits of associates andjoint ventures - - 0.5 0.5Other income - - 0.1 0.1Finance costs - net (21.9) - 1.1 (20.8) Profit before tax 84.1 9.9 9.7 103.7 OTHER INFORMATIONCapital additions 100.4 0.3 (3.4) 97.3Depreciation and amortisation 27.2 0.5 0.1 27.8Amortisation of deferred revenue (5.6) - - (5.6) "Other" comprises generation, business support units and consolidationadjustments. Interest on loans to and from the different activities is charged at acommercial rate of interest. Sales and purchases between the different activities are made at market prices. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 4. INCOME TAX EXPENSE Six months ended 30 Six months ended 30 Year ended June June 31 December 2005 2004 2004 Unaudited Unaudited Audited £m £m £m Current tax 12.3 13.0 23.9 Deferred tax 6.4 4.3 18.5 18.7 17.3 42.4 Tax for the interim period is calculated by applying the effective average taxrate of 30% (2004: 30%) on profit before preference dividends accrued. Preference dividends are included within finance costs. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 5. PRIOR PERIOD ADJUSTMENT During the year ended 31 December 2004 the accounting policy in relation tointerest costs was changed. Interest costs attributable to capital work inprogress are now expensed rather than being capitalised. This change in policywas made in order to bring the Group into line with the accounting policies ofcompanies operating in the same sector. The impact on the results for the six months ended 30 June 2004 of the change inaccounting policy is as follows: £m Operating costs 0.4 Profit from operations 0.4 Finance costs - net (0.8) Profit before tax (0.4) Tax on profit on ordinary activities 0.1 Profit from ordinary activities after tax (0.3) The impact on the 30 June 2004 balance sheet is as follows: £m Property, plant and equipment (30.4) Deferred income tax liabilities 4.8 Equity (25.6) 6. BORROWINGS On 5 May 2005 the Group issued a £150m 30-year bond at a rate of 5.125%. £100mof the proceeds were invested in a guaranteed investment contract at a rate of4.75%, which matures on 27 December 2007. 7. DEFERRED TAX Deferred tax of £37.3m (June 2004: £29.5m, December 2004: £37.3m), has beenprovided for in relation to rollover relief claimed in accordance with IAS 12 "Income Tax". This liability will not result in a cash outflow from the Group. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 8. RELATED PARTY TRANSACTIONS Transactions between the Company and its subsidiaries, which are relatedparties, have been eliminated on consolidation and are not disclosed in thisnote. Transactions between the Group and subsidiaries of its parent company andbetween the Group and its associates are disclosed below. The Group has received/made loans from/to companies in the CE Electric UKFunding Company Group. The total interest included in finance costs in theincome statement for the six months ended 30 June 2005 was £3.9m (six monthsended 30 June 2004: £2.5m, year ended 31 December 2004: £5.9m). Included withincash and cash equivalents is £203.8m as at 30 June 2005 (30 June 2004: £145.1m,31 December 2004: £152.9m) and within trade and other payables £15.5m as at 30June 2005 (30 June 2004: £21.0m, 31 December 2004: £18.7m) in respect of theseloans. Interest on loans from/to group companies is charged at a commercial rate ofinterest. The Group entered into transactions, in the ordinary course of business, withYorkshire Electricity Distribution plc ("YEDL"), Teesside Power Limited ("TPL")and Vehicle Lease and Service Limited ("VLS"). Transactions entered into andtrading balances outstanding were as follows: Purchases Amounts Owed from Related by Related Sales to Party Party Amounts Owed to Related Party Related Party Related Party £m £m £m £m June 2005:YEDL 17.5 - 2.9 -TPL - (0.8) 0.1 -VLS 0.1 3.0 0.4 - June 2004:YEDL 16.5 - - -TPL - (0.1) 0.1 -VLS 0.1 3.0 - 0.3 December 2004:YEDL 39.7 - - -TPL - (0.3) - -VLS 0.2 5.8 1.4 0.3 Sales and purchases from related parties were made at market prices. The amounts outstanding are unsecured and will be settled in cash. No guaranteeshave been given or received. No provisions have been made for doubtful debts inrespect of amounts owed by related parties. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 9. NOTES TO THE CASH FLOW STATEMENT Reconciliation of operating profit to net cash from operating activities Six months Six months Year ended ended 30 June ended 30 June 2005 2004 31 December 2004 Unaudited Unaudited Audited £m £m £m Operating profit 62.4 63.8 123.9Depreciation and amortisation 15.6 12.8 27.8Amortisation of deferred revenue (3.2) (2.7) (5.6)Decrease in retirement benefitobligation (10.3) (3.1) (7.6)(Decrease)/increase in provisions (0.9) 0.7 1.1 Operating cash flows before movements inworking capital 63.6 71.5 139.6 Increase in inventories (8.1) (4.8) (3.4)Decrease in receivables 4.1 13.9 5.4Decrease in payables (7.3) (5.1) 3.7 Cash generated by operations 52.3 75.5 145.3 Income taxes paid (24.1) (2.9) (10.4)Interest received 7.3 4.4 10.9Interest paid (9.8) (6.4) (31.5) Net cash from operating activities 25.7 70.6 114.3 10. PENSIONS The principal annual actuarial assumptions used were as follows: 30 June 30 June 31 December 2005 2004 2004 Unaudited Unaudited Audited % % % Discount rate 5.25 5.50 5.50Expected return on plan assets 7.00 7.00 7.00Future salary increases 2.75 2.75 2.75Future pension increases 2.50 2.50 2.50 11. CAPITAL AND OTHER COMMITMENTS The Group has entered into contractual commitments in relation to capitalinvestment of £5.0m (30 June 2004: £4.8m, 31 December 2004: £5.0m). NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS The Group's financial statements for the year ended 31 December 2005 will be thefirst annual financial statements that comply with IFRS. These interim financialstatements have been prepared as described in note 2. The Group has applied IFRS1, "First-Time Adoption of International Financial Reporting Standards". The Group's transition date is 1 January 2004. The Group prepared its openingIFRS balance sheet at that date. In preparing these interim consolidatedfinancial statements in accordance with IFRS 1, the Group has applied themandatory exceptions from full retrospective application of IFRS. In addition it has elected to recognise all cumulative pension scheme actuarialgains and losses as at 1 January 2004. SUMMARY RECONCILIATION OF EQUITY 1 January 30 June 31 December Note 2004 2004 2004 Audited Unaudited Audited £m £m £m Total equity under UK GAAP 417.2 477.1 505.0Prior period adjustment (Note 5) - (25.6) - Total equity under UK GAAP (restated) 417.2 451.5 505.0Retirement benefit obligations A (51.2) (48.0) (44.7)Restatement of carrying value of TPL B 24.3 25.5 2.7Reclassification of preference shares C (1.1) (1.1) (1.1)Reversal of deferred tax discount D (58.9) (61.7) (62.5)Recognition of deferred tax on rolloverrelief claims E (29.5) (29.5) (37.3) Total equity under IFRS 300.8 336.7 362.1 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) RECONCILIATION OF EQUITY AT 1 JANUARY 2004 Effect of Transition to IFRS Note UK GAAP IFRS Audited £m £m £m Non-current assetsProperty, plant and equipment A, F, G & H 613.6 253.8 867.4Intangibles H - 7.2 7.2Investments in associates 2.8 - 2.8Investments in other companies 0.1 - 0.1Trade receivables 4.1 - 4.1 620.6 261.0 881.6 Current assetsInventories G 10.7 (1.0) 9.7Trade and other receivables I 161.0 (110.3) 50.7Cash and cash equivalents I - 110.3 110.3 171.7 (1.0) 170.7 Total assets 792.3 260.0 1,052.3 Current liabilitiesTrade and other payables F (66.9) (5.6) (72.5)Current income tax liabilities (17.3) - (17.3)Provisions (7.8) - (7.8) (92.0) (5.6) (97.6) Net current assets 79.7 (6.6) 73.1 Non-current liabilitiesBorrowings C (198.1) (1.1) (199.2)Deferred income tax liabilities A, D & E (57.1) (66.4) (123.5)Retirement benefit obligations A (3.1) (73.2) (76.3)Deferred revenue F - (254.4) (254.4)Provisions B (24.8) 24.3 (0.5) (283.1) (370.8) (653.9) Total liabilities (375.1) (376.4) (751.5) Net assets 417.2 (116.4) 300.8 EQUITYShare capital C 73.3 (1.1) 72.2Share premium 158.8 - 158.8Retained earnings A, B, D & E 178.9 (115.3) 63.6Other reserves 6.2 - 6.2 Equity attributable to equity holdersof the parent 417.2 (116.4) 300.8 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) RECONCILIATION OF EQUITY AT 30 JUNE 2004 UK GAAP Effect of Transition to Restated IFRS Note (Note 5) IFRS Unaudited £m £m £mNon-current assetsProperty, plant and equipment A, F, G & H 632.8 263.4 896.2Intangibles H - 7.2 7.2Investments in associates 2.9 - 2.9Investments in other companies 0.1 - 0.1Trade receivables 4.7 - 4.7 640.5 270.6 911.1 Current assetsInventories G 15.5 (1.0) 14.5Trade and other receivables I 183.6 (145.1) 38.5Cash and cash equivalents I 0.6 145.1 145.7 199.7 (1.0) 198.7 Total assets 840.2 269.6 1,109.8 Current liabilitiesTrade and other payables F (66.7) (6.0) (72.7)Current income tax liabilities (27.5) - (27.5)Provisions (8.7) - (8.7) (102.9) (6.0) (108.9) Net current assets 96.8 (7.0) 89.8 Non-current liabilitiesBorrowings C (198.1) (1.1) (199.2)Deferred income tax liabilities A, D & E (57.2) (70.6) (127.8)Retirement benefit obligations A (4.6) (67.6) (72.2)Deferred revenue F - (264.6) (264.6)Provisions B (25.9) 25.5 (0.4) (285.8) (378.4) (664.2) Total liabilities (388.7) (384.4) (773.1) Net assets 451.5 (114.8) 336.7 EQUITYShare capital C 73.3 (1.1) 72.2Share premium 158.8 - 158.8Retained earnings A, B, D & E 213.2 (113.7) 99.5Other reserves 6.2 - 6.2 Equity attributable to equity holders ofthe parent 451.5 (114.8) 336.7 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) RECONCILIATION OF EQUITY AT 31 DECEMBER 2004 Effect of Transition to IFRS Note UK GAAP IFRS Audited £m £m £mNon-current assetsProperty, plant and equipment A, F, G & H 659.8 277.4 937.2Intangibles H - 6.9 6.9Investments in associates 3.1 - 3.1Investments in other companies 0.1 - 0.1Trade receivables 4.8 - 4.8 667.8 284.3 952.1 Current assetsInventories G 14.1 (1.0) 13.1Trade and other receivables I 199.1 (152.9) 46.2Cash and cash equivalents I - 152.9 152.9 213.2 (1.0) 212.2 Total assets 881.0 283.3 1,164.3 Current liabilitiesTrade and other payables F (69.8) (6.4) (76.2)Current income tax liabilities (30.7) - (30.7)Borrowings (99.9) - (99.9)Provisions (8.0) - (8.0) (208.4) (6.4) (214.8) Net current assets/(liabilities) 4.8 (7.4) (2.6) Non-current liabilitiesBorrowings C (98.3) (1.1) (99.4)Deferred income tax liabilities A, D & E (61.4) (80.6) (142.0)Retirement benefit obligations A (4.8) (62.0) (66.8)Deferred revenue F - (278.8) (278.8)Provisions B (3.1) 2.7 (0.4) (167.6) (419.8) (587.4) Total liabilities (376.0) (426.2) (802.2) Net assets 505.0 (142.9) 362.1 EQUITYShare capital C 73.3 (1.1) 72.2Share premium 158.8 - 158.8Retained earnings A, B, D & E 266.7 (141.8) 124.9Other reserves 6.2 - 6.2 Equity attributable to equityholders of the parent 505.0 (142.9) 362.1 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) RECONCILIATION OF NET INCOME FOR 6 MONTHS ENDED 30 JUNE 2004 UK GAAP Restated Effect of Transition to (Note 5) IFRS Note IFRS Unaudited £m £m £m Revenue F 140.1 2.7 142.8Cost of sales (45.2) - (45.2) Gross profit 94.9 2.7 97.6 Distribution costs F (22.6) (2.7) (25.3)Administrative expenses A (13.1) 4.6 (8.5) Operating profit 59.2 4.6 63.8 Share of profits of associates and jointventures B 1.3 (1.0) 0.3Finance costs - net B & C (9.0) (1.9) (10.9) Profit before tax 51.5 1.7 53.2 A, B, D & E Income tax expense (12.7) (4.6) (17.3) Profit from ordinary activities aftertax 38.8 (2.9) 35.9 Dividends C (4.5) 4.5 - Retained Profit 34.3 1.6 35.9 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) RECONCILIATION OF NET INCOME FOR YEAR ENDED 31 DECEMBER 2004 Effect of Transition to IFRS Note UK GAAP IFRS Audited £m £m £m Revenue F 282.2 5.6 287.8Cost of sales (94.1) - (94.1) Gross profit 188.1 5.6 193.7 Distribution costs F (43.6) (5.6) (49.2)Administrative expenses A (29.9) 9.3 (20.6) Operating profit 114.6 9.3 123.9 Share of profits of associates andjoint ventures B 36.3 (35.8) 0.5Other income 0.1 - 0.1Finance costs - net B & C (18.0) (2.8) (20.8) Profit before tax 133.0 (29.3) 103.7 Income tax expense A, B, D & (36.2) (6.2) (42.4) E Profit from ordinary activitiesafter tax 96.8 (35.5) 61.3 Dividends C (9.0) 9.0 - Retained Profit 87.8 (26.5) 61.3 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) RECONCILIATION OF CASH FLOWS Loans advanced to the parent company are included within cash and cashequivalents, having a maturity of less than three months. Taxation outflows of £2.9m in relation to the 6 months ended 30 June 2004 and£10.4m in respect of the year ended 31 December 2004 are included withinoperating cash flows. Under UK GAAP these were shown as a separate category onthe cash flow statement. Finance cost outflows of £2.0m in relation to the 6 months ended 30 June 2004and £20.6m in respect of the year ended 31 December 2004 are included withinoperating cash flows. Under UK GAAP these were shown within returns oninvestments and servicing of finance. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) NOTES A - Retirement benefit obligation Deferred income tax Property, plant Retirement liabilities and equipment benefit obligation Equity £m £m £m £m Recognition of actuarial lossnot recognised under UK GAAPat date of transition 1January 2004 - (73.2) 22.0 (51.2) Adjustment to pension costs inaccordance with IAS 19 (1.0) 5.6 - 4.6 Deferred tax on costadjustment - - (1.4) (1.4) Impact on equity at 30 June2004 (1.0) (67.6) 20.6 (48.0) Adjustment to pension costs inaccordance with IAS 19 (0.9) 5.6 - 4.7 Deferred tax on costadjustment - - (1.4) (1.4) Impact on equity at 31December 2004 (1.9) (62.0) 19.2 (44.7) NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) NOTES (continued) B - Investment in associates and joint ventures Unlike UK GAAP there is no requirement under IFRS to carry an associate or ajoint venture at a negative value unless there is an obligation to fund thatdeficit. Long-term Provisions Equity £m £m Reversal of negative carrying value for investment in associate at dateof transition 1 January 2004 24.3 24.3 Reversal of share of associate's operating profit (0.9) (0.9)Reversal of share of associate's finance expense 2.6 2.6Reversal of share of associate's tax expense (0.5) (0.5) Impact on equity at 30 June 2004 25.5 25.5Reversal of share of associate's operating profit (34.5) (34.5)Reversal of share of associate's finance expense 3.4 3.4Reversal of share of associate's tax expense 8.3 8.3 Impact on equity at 31 December 2004 2.7 2.7 The share of the profits of an associate or joint venture is shown as a singleline item on the income statement in accordance with IFRS. Under UK GAAP theshare of the operating results, net finance cost and income tax expense areincluded separately in the income statement. Six months Year ended 31 ended 30 June December 2004 2004 £m £m Share of profits of associates and joint ventures (0.1) (0.4) Finance costs - net - 0.2 Income tax expense 0.1 0.2 C - Preference shares Preference shares totalling £1.1m, previously included within share capital havebeen reclassified to non-current borrowings. Dividends payable of £4.5m for thesix months ended 30 June 2004 and £9.0m for the year ended 31 December 2004 onthese shares have been reclassified from dividends to finance costs. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) NOTES (continued) D - Deferred tax discount Deferred tax under IFRS is calculated on a gross basis whereas under UK GAAP thegross liability was discounted if material. Deferred income tax liabilities Equity £m £m Reversal of deferred tax discount at date of transition 1 January 2004 (58.9) (58.9) Reversal of discount in tax expense (2.8) (2.8) Impact on equity at 30 June 2004 (61.7) (61.7) Reversal of discount in tax expense (0.8) (0.8) Impact on equity at 31 December 2004 (62.5) (62.5) E - Deferred tax on rollover relief claims In accordance with IFRS deferred tax has been provided on chargeable gains thathave been rolled over into qualifying replacement capital expenditure. Deferred income tax liabilities Equity £m £m Recognition of deferred tax on rollover relief claims at date oftransition 1 January 2004 (29.5) (29.5) Recognition of tax expense on rollover relief claimed - - Impact on equity at 30 June 2004 (29.5) (29.5) Recognition of tax expense on rollover relief claimed (7.8) (7.8) Impact on equity at 31 December 2004 (37.3) (37.3) NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) NOTES (continued) F - Customer contributions In accordance with IFRS, customer contributions are recorded on the balancesheet as deferred. Under UK GAAP they were netted against property, plant andequipment. The amortisation of the deferred revenue is included in revenue, asopposed to a reduction in the deprecation charge. Property, Trade and plant and other equipment payables Deferred revenue £m £m £m Reclassification at date of transition 1 January 2004 260.0 (5.6) (254.4) Additions 13.3 - (13.3)Released to the income statement (2.7) - 2.7Reclassification - (0.4) 0.4 Impact at 30 June 2004 270.6 (6.0) (264.6) Additions 17.5 - (17.5)Released to the income statement (2.9) - 2.9Reclassification - (0.4) 0.4 Impact at 31 December 2004 285.2 (6.4) (278.8) NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) NOTES (continued) G - Strategic spares Strategic spares that can only be used in connection with an item of property,plant and equipment and the use of which is expected to be irregular, areaccounted for as fixed assets and are depreciated over a time period notexceeding the useful life of the related asset. Property, plant and equipment Inventories £m £m Reclassification at date of transition 1 January 2004 1.0 (1.0) Net additions - - Impact on equity at 30 June 2004 1.0 (1.0) Net additions - - Impact on equity at 31 December 2004 1.0 (1.0) H - Software costs Capitalised software costs that are not an integral part of the related hardwareare treated as an intangible asset on the balance sheet. Property, plant and equipment Intangibles £m £m Reclassification at date of transition 1 January 2004 (7.2) 7.2 Net additions (1.2) 1.2Depreciation and amortisation 1.2 (1.2) Impact at 30 June 2004 (7.2) 7.2 Net additions (0.6) 0.6Depreciation and amortisation 0.9 (0.9) Impact at 31 December 2004 (6.9) 6.9 NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) NOTES (continued) I - Cash and cash equivalents Loans advanced to the parent company of £110.3m as at 1 January 2004, £145.1m asat 30 June 2004 and £152.9m as at 31 December 2004 have been reclassified fromtrade and other receivables to cash and cash equivalents, having a maturity ofless than three months. NORTHERN ELECTRIC plc INTERIM REPORT - SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) NOTES (continued) SUMMARY INCOME STATEMENT Finance costs - Income tax expense net £m £m 6 months ended 30 June 2004 (A) Retirement benefit obligations - (1.4)(B) Investment in associate 2.6 (0.4)(C) Preference shares (4.5) -(D) Deferred tax discount - (2.8)(E) Deferred tax on rollover relief claims - - Net impact of adoption of IFRS (1.9) (4.6) Year ended 31 December 2004 (A) Retirement benefit obligations - (2.8)(B) Investment in associate 6.2 8.0(C) Preference shares (9.0) -(D) Deferred tax discount - (3.6)(E) Deferred tax on rollover relief claims - (7.8) Net impact of adoption of IFRS (2.8) (6.2) NORTHERN ELECTRIC plc INTERIM REPORT SIX MONTHS ENDED 30 JUNE 2005 NOTES TO THE ACCOUNTS (continued) 12. EXPLANATION OF TRANSITION TO IFRS (continued) NOTES (continued) SUMMARY BALANCE SHEET Property, Deferred income plant and tax liabilities equipment £m £m 1 January 2004 (A) Retirement benefit obligations - 22.0(D) Deferred tax discount - (58.9)(E) Deferred tax on rollover relief claims - (29.5)(F) Customer contributions 260.0 -(G) Strategic spares 1.0 -(H) Software costs (7.2) - Net impact of adoption of IFRS 253.8 (66.4) 30 June 2004 (A) Retirement benefit obligations (1.0) 20.6(D) Deferred tax discount - (61.7)(E) Deferred tax on rollover relief claims - (29.5)(F) Customer contributions 270.6 -(G) Strategic spares 1.0 -(H) Software costs (7.2) - Net impact of adoption of IFRS 263.4 (70.6) 31 December 2004 (A) Retirement benefit obligations (1.9) 19.2(D) Deferred tax discount - (62.5)(E) Deferred tax on rollover relief claims - (37.3)(F) Customer contributions 285.2 -(G) Strategic spares 1.0 -(H) Software costs (6.9) - Net impact of adoption of IFRS 277.4 (80.6) This information is provided by RNS The company news service from the London Stock Exchange